Corn Farms Prosper, but Subsidies Still Flow

By Dan Morgan
Special to The Washington Post
Friday, September 28, 2007

RADCLIFFE, Iowa -- Corn farmer Jim Handsaker has found a slew of ways to ride the heartland boom in biofuels that is reshaping the economy of rural Iowa.

He sold some of his 2006 crop this year for more than $4 a bushel, the highest price in a decade. His stake in two nearby ethanol plants brought in several thousand dollars more in dividends. Meanwhile, soaring farmland prices have pushed the value of the 400 acres he owns to around $2 million.

Even so, come October he will get a subsidy check from the government, part of a $1.6 billion installment that the U.S. Department of Agriculture will send to corn farmers.

Those annual automatic payments to Handsaker and thousands of other prospering corn growers have long been controversial. But coming at a time when taxpayers are already subsidizing the ethanol industry to the tune of $3 billion a year, the double-barreled support system for those who grow corn and those who turn it into fuel has begun to draw fire in Congress.

"Federal farm subsidies are already narrowly focused on certain crops and are excessive," said Sen. Richard G. Lugar (R-Ind.), a farmer and former chairman of the Senate agriculture committee. "They become ridiculous given the exploding possibilities to grow crops for biofuels production."

So far, Congress has shown little inclination to adjust the subsidies to account for the new energy-driven rural economy.

A House-passed farm bill would give corn growers $10.5 billion over the next five years, even if prices stay high. These "direct payments," a kind of annual allowance, are set by formula and go out automatically, regardless of prices, profits, yields or weather.

At the same time, a Senate-approved energy bill would double the federal requirement for the use of ethanol from corn -- a move that should further buttress corn prices.

Handsaker, a Republican who keeps a framed picture of President and Mrs. Bush in his office, argues that such farm subsidies help keep agricultural land in the hands of family farmers and away from corporate monopolies.

Handsaker is not banking on the ethanol boom lasting. "We've all been down the road of price plateaus," he said.

But he acknowledges that justifying the payments is not easy in the midst of an energy renaissance in the heartland. Country roads are dotted with signs advertising "ethanol corn" -- genetically engineered seeds with the high starch content ideal for making 200-proof, high-octane ethanol.

Just weeks before the October harvest, Hardin County, Handsaker's home in central Iowa, was a sea of corn rolling southwest from Iowa Falls. Handsaker once grew a mix of corn and soybeans on the farmland he and his brothers own or rent. "Now we're 100 percent corn," he said.

On a once quiet highway west of Iowa Falls, a constant stream of tractor-trailers pound the road, hauling corn to the Hawkeye Renewables ethanol refinery and soybeans to Cargill Inc.'s biodiesel plant.

To celebrate a banner year, Hawkeye founder and chief executive Bruce Rastetter pulled out the stops for his annual midsummer bash. Several hundred politicians, businessmen and farmers mingled at his richly landscaped hilltop estate, and Sen. Charles E. Grassley (R-Iowa) made his entrance in a wagon pulled by Rastetter's team of Percheron draft horses.

"It's a great country," said Rastetter, a Hardin County native who started with a few acres of farmland and a small feed business 20 years ago. He recently pledged $1.75 million to Iowa State University. In addition to his Iowa Falls plant, he operates a second one in a nearby county and has two more under construction.

The boom has helped push shares in Iowa ethanol plants to double or triple the initial price. Bill Couser, a corn grower and cattleman who was a driving force behind a new ethanol plant in neighboring Story County, says a grateful local school bus driver who bought shares "waves and honks every time she drives by."

"That's the secret of this ethanol industry," Couser said. "It's keeping the dollars at home."

In July, Pine Lake Corn Processors, the second Hardin County plant after Hawkeye's, announced profits for the previous eight months of $3,800 a share, more than the $3,250 cost of the initial investment. "It's worked out better than my wildest dreams," said Pine Lake President Larry Meints, a corn grower who pushed for the new plant after becoming fed up with hauling grain to distant elevators.

The new market means corn-rich Hardin County has to import the crop even though it grows 35 million bushels a year. The county can't supply its two ethanol refineries and its thriving pork, beef and poultry industries.

"Things are good here," said Howard B. Wenger, president of Iowa Falls State Bank, who reviews the balance sheets of hundreds of farmers.

He estimates that most farmers earned between $100 and $400 an acre on their 2006 crop after expenses, depending on whether they owned or rented their land. That translates into profits of $100,000 to $400,000 on a 1,000-acre farm. The USDA predicts that net farm income will be $87.1 billion this year, up nearly 50 percent over 2006.

Iowa farmland values are up 18 percent in the past 12 months, according to Federal Reserve Board surveys, making millionaires on paper out of any farmers owning 200 acres free and clear.

The rural prosperity is due in large measure to billions of dollars in federal subsidies and incentives for corn-based energy. These include a 51-cent tax credit that gasoline manufacturers get on every gallon of ethanol they mix with their blends, and more than $500 million in federal cash to ethanol refiners between 2001 and 2006.

In 2005, Congress required the use of at least 7.5 billion gallons of ethanol a year by 2012. Then in 2006 came new demand for ethanol as a pollution-curbing additive, along with a jump in gasoline prices that made the corn-based fuel competitive.

"We're harvesting the sun out here," said Handsaker, a genial man who typifies the new breed of businessman-farmer. "We're creating something with sun and chemicals and water and making a renewable product instead of unloading an oil tanker."

When he started in 1971, he recalled, farmers sold their crops to the local livestock industry or sent them "down the river" to volatile export markets.

Prices soared when the Soviet harvest failed or Argentina's corn crop fell short. In between, government payments bridged the gap between solvency and bankruptcy. From 2001 through 2005, Handsaker and his two brothers collected more than $500,000, according to USDA records.

Now four ethanol plants have sprouted within easy trucking distance of their farms and will get about half the 450,000 bushels they produce.

Still, the three brothers stand to collect about $45,000 in direct payments this year, based solely on their previous crop acreage and yields, according to USDA records. Congress created the payments in 1996 as part of a plan to temporarily buttress farm incomes while other traditional subsidies were eliminated. They were supposed to be phased out. Instead, the 2002 farm bill continued them.

"It's a bonus program, not a safety net," said Sen. Richard J. Durbin (D-Ill.). "Farmers I talk to know it's not politically sustainable to ask taxpayers to make payments to them in highly profitable years."

Durbin plans to offer a farm bill amendment that would gradually replace the automatic payments with a program to compensate growers when statewide farm revenues fall below the norm. The National Corn Growers Association embraces a similar plan. This week, the Senate agriculture committee's chairman, Tom Harkin (D-Iowa), circulated a proposal to cut direct payments by $4.5 billion over five years.

The American Farm Bureau Federation, the country's largest farm organization, opposes any changes, but the National Farmers Union, the nation's second-largest, supports an overhaul of direct payments. "It's the most costly and inefficient method for providing a safety net," said the union's president, Tom Buis.

Lugar, the senator from Indiana, favors scrapping the current farm program and using crop insurance and tax-exempt savings accounts to tide farmers over in bad years.

"A farmer's best friend in Iowa is the energy bill," said Bruce Babcock, a professor of economics at Iowa State. "What do you need the direct payments for? It's money for nothing."

Rastetter, along with most others in the ethanol industry, argues that increasing requirements for ethanol use would do more for corn growers than farm programs would. If the government expands its support for ethanol, he said, "then the market price of corn will support farmers and provide the safety net."

But relying on energy policy instead of the traditional farm program worries many in rural Iowa who remember previous bubbles.

The bank still holds a mortgage on his land, Handsaker notes.

Ethanol prices have been tumbling recently as supply catches up with demand. Some ethanol companies, including Rastetter's, have put plans for new refineries on hold pending action by Congress to expand required use.

But such action faces stiff opposition from the livestock industry, which contends that the added demand for corn could mean higher feed and food costs. Environmental groups say it could jeopardize water supplies and sensitive lands in exchange for only minimal savings in the use of fossil fuels, given the amounts of gasoline and chemical fertilizer needed to raise corn.

Meanwhile, the prices of fertilizer, seed and land have been rising rapidly as landlords and corporations move to capture their share of higher grain prices. "As far as the bioeconomy, I don't think any of us thinks it's the golden egg," said April Hemmes, who owns 1,000 acres of prime farmland near Iowa City.

Morgan, a former Post reporter who specialized in agriculture, is a contract writer of the newspaper and a fellow with the German Marshall Fund, a nonpartisan public policy institution.

Database editor Sarah Cohen contributed to this report.

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